July 26, 2013
We didn’t run out of Soybeans…
And last week saw an historic crash in old crop prices...
To say that the grain markets, particularly the Soybeans, have recently been quite volatile, would qualify as the mother of all understatements.
As I have been forever predicting, during the past 4 days, old crop Soybeans FINALLY collapsed as the realization FINALLY hit we weren’t going to run out of soybeans...and the August contract experienced a nosedive unlike anything ever seen before (I believe) in the history of Soybean trading.
The chart says it all…
And the spread I recently recommended worked in a big way as well…Short August vs Long November Soybeans…
However, “there is no joy in Mudville”.
In one of the greater trading disappointments I have experienced in years, as adamant as I have been this “crash” was going to happen, by the beginning of this week, with August still posting new highs, I had pretty much given up on the idea…and for the most part, was out of the trade, the result being, excepting some previously thought-to-be-dead put options (far out of the money), and zero positions in the spread, I WAS NOT ON IT WHEN IT HAPPENED.
My approach to this business has always been to, “tell it like it is”, to put my ideas out there in the plainest English I can, to hopefully allow you to easily understand what I am thinking and why I am thinking it, and one facet of speaking that “truth” is admitting when I feel like a total, freaking idiot…which is the case now.
Frankly, the last few months have eaten me…and some of you…alive. After a string of some truly great trades (Dow Jones, Gold, Lumber, Cotton, Wheat, Feeder Cattle) earlier in the year, my strong convictions regarding the short side of old crop Corn and Soybeans have since meant nothing but losses for several months now…and then having to stomach not being there when it finally happened in Soybeans is definitely demoralizing…
However, after three decades in this chair, this is not the first time I have seen money seemingly “evaporate” as trades went seriously bad. This is not the first time I have subsequently wanted to just crawl in a hole and hide…where the idea of supposing anybody should listen to what I think feels absurd…nor will it probably be the last. As my eye-level sign on the wall reminds me: YOU WILL BE WRONG. YOU WILL BE RIGHT.
But…one of the reasons I have survived for 33 years in this business is I always seem to be at my best after I have been at my worst. Screwing up has always led me to focus on the basics, to make only the smart trades, to slow down and concentrate only on ideas that looks like they have major profit potential, and in my eyes, also have an extraordinary probability of succeeding. And while this does NOT mean I will be right, per my experiences, I do believe it dramatically increases my odds of success.
I have one wise old bird who occasionally will ask, “What is it that you just KNOW is going to happen?”, which is certainly not to imply I ever do KNOW what will happen in the markets, but simply that he recognizes there are times when virtually 150% of my trading instincts, market observations and experience tell me, “This bet is as good as it ever gets. This should absolutely happen. I can’t imagine it being otherwise”…Again, this does NOT mean I will be right…But these “I know” ideas are really the only trades you ever should make…and some trades really ARE better and DO just as absolutely have a better than average chance of working.
This is not to say I EVER put anything in this newsletter that I don’t believe 100%...being wrong is severely detrimental to the cause here…but there are, therefore, points in time when my psychological “filters” do lead me to acutely pare down my thinking and target ONLY what I “know”…which is precisely my state of mind right now. While I have several areas I am watching intently, at this moment, there are only two places I want to be…
Here’s the first one…
Stay Short Wheat
I see it, minimally, $1.25 to $1.50 a bushel lower
The truth is, the more I watch this market, the more and more bearish I become. Among Corn, Soybeans and Wheat (which kind of move roughly in concert), Wheat has definitely been the weak sister for the past year, maybe even a bit of the leader on the downside, and with it now sitting dead on 18 month lows, this still seems to be the case.
A few observations I believe to be significant...
Wheat is essentially a weed, EASILY the easiest of the three to get in and out of the ground, and can generally be grown all year round (in some form), all over the planet.
It is currently not remotely close to being considered in short supply…which probably accounts for it having made new contract lows during the past week…but even so, it is still trading at price levels which I can only classify as “historically high” (charts follow).
However, with Wheat making new lows, and with this market, by any definition you want to use, definitively in a bear market, seemingly 100% of the media and analyst opinion I can find is saying, “Buy it. It should bottom here”. In fact, on Friday, I had one individual, who is very well informed as to what the advisory and brokerage house services are recommending, tell me, “Bill, you are the only bear there is. Everybody else is talking nothing but the upside”.
As I am forever repeating, THE MARKETS ARE A GIANT MOB PSYCHOLOGY GAME, and along these lines, if there is one thing I “know”, it is: BOTTOMS ARE NOT MADE WHEN EVERYBODY IS BULLISH. Very much to the contrary, WHEN MARKETS ARE MAKING NEW LOWS, AND ALL YOU HEAR FROM THE “EXPERTS” IS, “BUY!”, WHAT IT REALLY MEANS, IS “KEEP SELLING. THE BOTTOM AIN’T EVEN CLOSE TO HERE”.
Such is my opinion anyway…And right or wrong, this is something I think “I KNOW”…that, in Wheat, the money is on the short side…NOT on the up side.
Just to give you an example of that bullish opinion, here is a fairly typical Wheat article from Friday’s wires…full of nothing but bullish talk, to the extent, if you weren’t looking at a chart, you’d think Wheat was already in a bull market…NOT in the process of making new lows…
Now…all of that sounds pretty bullish doesn’t it? Exports “on fire”, sales way ahead of the USDA’s projections, “worries” about Russian crops, etc.? And believe me, there’s a LOT more of the same being touted out there…BUT…if those statements are truly bullish factors, WHY is the market making new lows? And beyond that, what happens when all those sales cool off, just a little even?
The answer is, there are always bullish AND bearish factors/influences in every market, and in this case, it is probably relevant that farmers are still sitting on mountains of wheat…with more still yet to come out of the fields…and what I believe we are soon going to see is the ever classic situation where those farmers find themselves scared into dumping their product…in a severely falling price environment…the result being mass selling, DEEP in the hole, propelling prices ever sharply lower.
It’s been a few years since we have seen this sort of price dump, but if you have been around agriculture for any real length of time, you’ll certainly remember this as an “event” that has played out, almost regularly, for decades…and is one which I absolutely think is coming again.
OK. That’s enough of my warped logic for now. I THINK WHEAT IS GOING IN THE TANK. I AM SHORT AND RECOMMEND BEING SHORT MORE.
Here are the charts…
Here’s the long term picture…
And here is one set of options that I believe has significant profit potential, AND has a decent chance of recouping 100% of your investment if I am wrong (if prices go up). Obviously, if this market goes dead sideways, it will probably mean losing money, up to that same 100% of your investment.
But before getting to my specific recommendation, I want to insert the following self declared reminder (trading rule) that has has been on my wall for years. It is there because I do not always heed my own advice…And so I need reminding…as it IS an excellent piece of advice.
IF YOU ARE NOT WILLING TO BUY BOTH SIDES (PUTS AND CALLS), DO NOT DO THE TRADE.
This strategy is not perfect…but it is the best way I know to ever approach just about any trade there is…
Another one of my back-to-basics rules is: Look for markets that probably won’t stay where they are…as is exactly the case here, where we “ought” to move significantly, one way or the other, away from those 18 month lows that have just been broken…whereby the new lows are a fake out, and I will be proven wrong as the market rallies (just as so many analysts are predicting), or it does really fall off the cliff and do again what it did between November and January…that is, drop about $2.00 a bushel…In any case, this is the perfect place for the both sides strategy I have recommended.
That’s it for now. The other trade I “know”, is BUY TREASURY BONDS, but there is still some Saturday daylight left (started this late yesterday afternoon) and I want to go do something physical in the yard instead of sitting any longer in front of this screen. I will try to cover the Treasuries and a few other potential (but not immediate) ideas in the next few days.
FOR NOW THOUGH…MY VERY STRONG RECOMMENDATION IS TO GET SHORT WHEAT…
If you have known my work for any length of time, you will have seen this chart (sideways range, breaking down) MANY times over the years. Without going into any final details, and it guarantees nothing, but this IS the best chart set up I know.
Give me a call if you are interested…
And if you are a farmer, I will again suggest you can use the December Wheat contract (and this two sided strategy) to hedge all the way out to next summer. I think this contract is headed immediately south and all the further out contracts will be doing the same. I fully believe Wheat could be $1.50 or even $2.00 lower before we get to 2014…Also to say that you are free to call any time it is convenient for you…nights or weekends...as I know your hours are long and irregular.
The author of this piece currently trades for his own account and has a financial interest in the following derivative product mentioned within: Wheat